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Supreme Court ruling regarding the parent company guarantee: Skeie Technology vs The Government of Norway

The Government’s case against Skeie Technology AS (Skeie) regarding the scope of the standard parent company guarantee has gone through three instances of court and finally been resolved. On 20 March 2020, the Norwegian Supreme Court (Supreme Court) decided that the parent company guarantee issued by Skeie did not cover the Government’s claim towards E&P Holding AS (EPH) for repayment of unduly reimbursed exploration costs.

The case in the District Court and the Appeal Court

In the first instance, the District Court of Oslo ruled that the issued parent company guarantee did not cover the Government’s claim on the ground that tax claims were not included. The Appeal Court overturned the ruling by the District Court and ruled in favour of the Government.  

The case before the Supreme Court

The case before the Supreme Court concerned the scope of the parent company guarantee issued by Skeie on 14 March 2008, as security for the obligations of its subsidiary EPH relative to EPH’s petroleum activities (“Guarantee”). The Guarantee was in the form of the model guarantee used by the Government.  The text of the Guarantee has been unaltered since 1979. 

The background for the Government’s claim was that EPH, due to financial difficulties, entered into an agreement with TGS Nopec Geophysical ASA (TGS) for the purchase of seismic data and pertinent consultancy services. Payment was organised as a loan that allowed TGS to convert the outstanding balance to shares in EPH. The payment obligation was entered into the financial statement of EPH as a cost, and tax refund was claimed. The tax authorities decided that the conditions for refund were not present since the cost was incurred for tax refund purposes and was not due to petroleum operations. The Government claimed repayment of the funds that were unlawfully received and invoked the guarantee. 

The Supreme Court’s opinion is that the Government’s claim for repayment falls outside the scope of both section 10-7 of the Petroleum Activities Act and the Guarantee. 

The Supreme Court’s approach to interpreting the guarantee

When interpreting the Guarantee, the Supreme Court employed a textual approach and stated that the starting point for the analysis is the plain meaning of the Guarantee, and considering the nature of such a document, there is not much room to deviate from the plain meaning. However, the scope of the Guarantee must be considered in light of the enabling provision, which is section 10-7 of the Petroleum Activities Act. Words and phrases used in the Guarantee must be understood as having the same meaning as words and phrases used in the enabling provision.  Consequently, the Supreme Court states that the Guarantee and the enabling provision must be read in conjunction.

The guarantee is only applicable to activities arising out of a production license

On this basis, a majority of the Supreme Court judges in the case (4 out of 5) found it undisputable that the Guarantee only applies to obligations that the principal debtor (here: EPH) has assumed or may assume as a licensee for the activities performed within the scope of a production license. Consequently, obligations that the company may have assumed outside of the awarded production licenses fall outside the scope of the Guarantee. It follows from this reasoning that a claim under the Guarantee must originate from an activity in an awarded production license.

The Appeal Court ruled in favour of the Government, inter alia, by reasoning that purchase of seismic data is an inherent part of the petroleum activities. The Supreme Court does not disagree with the Appeal Court on this point, but adds that the seismic data must be utilised in an awarded production licence in order to fall within the scope of the Guarantee (and section 10-7 of the Petroleum Activities Act).

The seismic data purchased by EPH covered an area outside the scope of its production licenses

Considering that the seismic data, purchased by EPH from TGS, covered a geographic area that was outside the scope of EPH’s petroleum licences, the Supreme Court concluded that the seismic data was not used in, and was not suitable for, use in an area where EPH had production licences. It further concludes that seismic data can be bought and sold without a production licence. The fact that EPH purchased the seismic data to finance the petroleum activities is not considered relevant since EPH did not assume any “obligations” connected to its financing.

On this basis, the Supreme Court concludes that the Government’s claim for repayment is not based on activities in a production licence held by EPH and therefore cannot prevail. 

The key premise for the Supreme Court is that the Guarantee only applies to activities directly attributable to an awarded production licence. This premise seems to be based on a principle that the “obligations” flow from the awarded production licence and not the activity performed. 

Some comments

The Supreme Court’s decision may give rise to additional questions. From time to time, licensees enter into agreements of a more general character that are not directly attributable to a production licence such as pipeline construction licences or the operation of energy production facilities intended to serve several production licences. This forces the question as to whether the central premise of the Supreme Court’s decision entails that the parent company guarantee issued by the licensees’ parent companies will not apply to these activities. Moreover, it is not clear whether the decision intends to distinguish between production licences and other licenses awarded under the Petroleum Activities Act, such as exploration licences. It does, however, seem that the purchase of seismic data, which have been collected by a third party (such as a seismic company), based on that party’s exploration licence, will not be covered by the parent company guarantee. 

In any case, the decision clearly suggests that the category of activities which are eligible for exploration cost tax refund is wider than the category of activities which are covered by the parent company guarantee. 

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